But a Milpitas maker of hard disk drives is challenging common wisdom and expanding its production to Fremont.

MMC Technology, a wholly owned subsidiary of Milpitas' Maxtor Corp., is increasing its disk-drive "media" manufacturing from a 140,000-square-foot building in San Jose to a second site in Fremont with 183,000 square feet. That includes 65,000 square feet of clean rooms, where the bulk of the manufacturing will take place.

Media refers to the platters inside disk drives where data is stored and from which it can be retrieved.

The decision culminates a complex, three-part transaction in which investment fund GI Partners of Menlo Park bought the Fremont buildings from Komag Inc. of San Jose for an estimated $25 million. GI then signed an eight-year lease with MMC.

The deal also sheds light on some of the competitive forces in the disk drive industry that are causing players to flee U.S. shores. It also shows how that pattern is affecting Silicon Valley employment and real estate, and how strongly Maxtor is swimming against the tide.

Eric Fox, Gregory Davies and Joe Moriarty of CPS Commercial Property Services of Santa Clara represented GI Partners in the acquisition and lease. John Brackett of Wayne Mascia Associates of Santa Clara represented Komag in the sale. Steve Horton and Wendy Roberts of CPS represented Maxtor in the lease.

Terms of the lease were not disclosed.

Maxtor reported net income of $6.2 million in its second quarter ended June 30, compared to a $103.3 million loss in the second quarter of 2002. The company makes information storage devices such as hard disk drives used in personal computers and servers as well as consumer electronics such as game consoles and set-top boxes. It sells about half of its output to PC makers.

All of MMC's current media production goes to Maxtor but is only enough to meet about half of Maxtor's current needs. MMC is expanding its media production primarily to meet Maxtor demand, which also is growing.

Maxtor, which is building a hard disk drive factory in China, considered going offshore with its media production as well, says Jenifer Kirtland, Maxtor's head of investor relations, but rejected the idea for several reasons.

"No. 1, we got a state-of-the art facility [in Fremont] that was originally designed to manufacture media, and we got the facility at a competitive rate. And the second main reason is that there are some new technological transitions occurring with media in the next couple of years, and we saw a real advantage to being co-located with our San Jose facility," she says.

"We also hope it will leverage our manufacturing economies."

New valley jobs will materialize as a result of the expansion, though how many isn't clear, Ms. Kirtland says.

Rick Magnuson, executive managing director for GI Partners, says the Fremont acquisition was a chance to fulfill the philosophical and financial goals of his $526 million fund, of which $500 million comes from the California Public Employees' Retirement System. CB Richard Ellis Investors contributed the remaining sum. The GI fund is investing in highly improved, technology-oriented real estate and technology-related businesses.

"We think Maxtor is a great company, and it's a very opportune time to have them bring manufacturing back on shore and to Silicon Valley," Mr. Magnuson says. "Our fund does represent CalPERS, and we are all quite supportive of creating jobs in California. At the same time, we create value for CalPERS because Maxtor is paying an attractive rent."

The specialized nature of the real estate it is buying and the unusual nature of the current recovery are making GI very cautious in its purchase decisions, he says.

"We are still having job losses even as the economy expands," he says. "If that's a cyclic trend, it implies that the demand for office and industrial space will eventually come back."

If, however, time reveals that the job loss is being caused by the flow of employment offshore, he says, "We are going to have some issues long-term in Silicon Valley."

In the last nine months, GI has spent $400 million, including equity and debt, on real estate. Something more than a fifth of its real estate investments so far have been in Silicon Valley. It also has made real estate acquisitions in Texas, Florida, Arizona, Georgia, Colorado and Europe.

About half of the total $526 million in equity has been invested in technology companies and real estate so far, Mr. Magnuson says. The GI Fund closed in March 2001.

Komag, which also produces media for disk drives (and is a major Maxtor supplier), has tried since 2000 to sell the Fremont complex, which it hasn't used for two years.

It originally sought $36 million for it, less than half of the buildings' replacement cost, but accepted closer to $25 million in the sale to GI, which closed Sept. 30, sources say.

It has a second plant in Oregon that remains on the market.

Komag filed for Chapter 11 bankruptcy reorganization in 2001 and emerged in 2002.

Kathy Bayless, Komag's chief financial officer, says her company plans to use half of the proceeds of the sale to reduce its debt.

Komag has all of its manufacturing offshore, as does the overwhelming majority of the industry, she says. The company retains research and development at its San Jose headquarters.

The media manufacturing industry underwent a surge of overcapacity, technological innovation, painful consolidation and steep price competition beginning in the mid-1990s, she says. Komag responded by taking all of its production to Malaysia, where it has spent the last decade cultivating a skilled work force and building relations with its customer base, the disk drive manufacturers.

The disk drive industry itself has undergone consolidation, with 85 percent of the market controlled by four large companies: Maxtor, Hitachi, Seagate and Western Digital, she says. The bulk of their manufacturing is likewise in Asia.

Today, supply and demand in the media industry are in "much better balance even than a year ago," Ms. Bayless says. The PC industry is gaining some revenue legs, and there are new applications emerging for disk drives.

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